By Geoff Coy, Certified Practising Accountant
Are you receiving or producing the necessary financial information that tells you how your business is performing?
Unfortunately, without informative financial statements few people in business really know how they are performing.
Recently I visited Con, a service station dealer who was experiencing financial difficulties and was convinced that his site was losing money.
Con was receiving financial statements prepared by his accountant but was confused by the results that were being presented to him.
The financial statements dealt in great detail with sales and gross profit performance, which indicated that generally the business was achieving gross margins acceptable in the industry.
Con was becoming confused because he had a healthy gross profit yet his bottom line showed a loss. Even more confusing was the fact that despite showing a trading loss the business was incurring a liability for company tax payments.
A quick look at the Financial Statements showed reports of over 50 pages which then required interpretation.
A closer look at the Profit & Loss Account revealed the following expenses: Amortisation of Goodwill and Amortisation of leased equipment.
The writing off of such items of expenditure in the annual financial statements complies with Accounting Standard and Corporation Law. However, when these items are included in regular management reports they can be misleading and create confusion. In this dealer's case, the treatment turned a trading profit into an "accounting loss".
For statutory purposes, Con's accountant was correctly writing off goodwill over the period of the lease, and this lead to a permanent timing difference which is not deductible for taxation purposes. Hence the reason company tax was being incurred, when a loss on trading was shown.
Unfortunately, the way in which the financial statements were prepared made it difficult for Con to interpret the information provided.
Not only did the reports contain too many pages of information but they were being received months after the end of the reporting period. This meant that they were already out-of-date once they had been received.
Con also had trouble in comprehending what had occurred in those reports because his focus was now placed on the month that had just finished.
The main problem being faced by Con was not easy to identify because of the format in which the financial statements were presented.
A closer look at the Balance Sheet showed a heavy investment in capital equipment as the dealer was endeavouring to upgrade most of the office, workshop and showroom equipment at the site.
In this instance the investment was being funded from retained profits rather than borrowing's and there was not sufficient after tax profits to allow for the current level of capital spending.
What Con required was for his business problems to be identified and related back to him in a timely manner together with suggestions on how to remedy the situation. Unfortunately, Con was not getting the advice he was paying for and was forced to look elsewhere for it.
So, when it comes to having your accounts prepared make sure you are not kept in the dark.
Ensure that your financial statements are:
Your reports should also contain the following information to assist you to identify any underlying problems:
Most people are not nearly as successful as they can be. A successful business person relies heavily on the information supplied by his accountant about his business.
It is most important that your accountant understands your business and your industry. He should be able to give you all the information you require to run your business efficiently and to tell you how your business stands up against the industry.
He should also inform you, clearly and concisely as to how your business is performing.
Remember, you are paying for the information and advice, so make sure it is presented to you in a way that you can interpret it.